As we head into fall, now is the perfect time to start thinking about your Flexible Spending Account for 2013. Open enrollment in these accounts are generally held in the late fall, and in order to make the best use of them, you’ll need to do a little planning and research ahead of time. Here is what you need to know in order to make the best use of your Flexible Spending Account (FSA).
What is a Flexible Spending Account?
If you have never enrolled in one of these accounts, you may be missing out on some major savings. A Healthcare Flexible Spending Account allows you to set aside pre-tax dollars from your paycheck to use for medical expenses, while a Dependent Care FSA allows you to set aside money for expenses like daycare for children under age 13 and care for elderly adults or disabled dependents.
The tricky aspect to FSAs is that they are a use-it-or-lose-it plan, which means you need to carefully estimate how much money you think you’ll need for these expenses over the year. FSAs typically allow a grace period for you to use any funds still left over at the end of the year, but seriously over- or underestimating your needs for the year can be costly.
Several websites, such as Kiplinger’s and WageWorks, offer calculators to help you determine how much money you should put away in your FSA. In order to take fullest advantage of these calculators, you will need to gather some information to really help you get a clear view of next year’s needs. That information includes:
- Last year’s FSA receipts if you still have them.
- A list of your regular prescriptions.
- An estimate of the number of times each member of the family visited the doctor this year. You can actually get a report from your insurance provider on how many medical claims each family member had last year.
- Any plans for future surgeries or procedures.
If you are mathematically inclined, you can further estimate the best use of your money by using a tool put together by The Finance Buff, who theorizes that “there has to be a point where losing a little pre-tax money in the FSA is less expensive than paying a lot with after-tax money.” The spreadsheet he provides can help those who are watching every single penny maximize their money (using some of the math you might have forgotten since high school.)
See Your Doctor
If you suspect that you may need some costly procedures in the next year—or if you simply have not been to see your healthcare providers recently—it makes sense to schedule an appointment with your doctor and dentist prior to the open enrollment period for your FSA. Your doctor can help you determine if you’ll need any special or elective care in the coming year, and you can budget the expense of it into your FSA plan.
Dependent Care FSA
Figuring out how much to put aside for dependent care tends to be a much easier proposition than doing the same for healthcare expenses, since daycare costs are predictable. However, it can be confusing determining whether you should use your Dependent Care FSA or take the childcare tax credit, as you cannot do both.
A general rule of thumb is that parents in higher tax brackets will benefit more from an FSA over the tax credit. As the website Babycenter points out, “the more you earn, the more you’ll benefit from an FSA, particularly if you’re at or above the 25 percent federal tax bracket. Taxpayers in the 15 percent federal tax bracket who have only one child and have qualified expenses of at least $3,000 may be best off with the FSA, too.” Knowing your tax bracket will help you decide whether or not to use the Dependent Care FSA.
When estimating your childcare expenses for the year, don’t forget to include summer camp and after-school care, as those costs can also be covered by an FSA.
The Bottom Line
If you’ve been avoiding enrolling in an FSA because you are nervous about the use-or-lose-it rule, now is the perfect time try it. With a little research and planning, your FSA can save you money and headaches in 2013.